Corporate Office Properties Trust (COPT) — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods. COPT is a REIT focused on office and data-center properties serving U.S. government and defense information-technology customers.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $130.1 million | $126.7 million | $390.5 million | $384.9 million |
| Operating income (loss) | ($8.6 million) | $27.7 million | $62.4 million | $45.3 million |
| Net income (loss) | ($20.8 million) | $7.5 million | ($1.9 million) | ($37.1 million) |
| Net income (loss) attributable to common shareholders | ($28.1 million) | $2.5 million | ($18.9 million) | ($47.5 million) |
| Diluted common-share EPS | ($0.39) | $0.03 | ($0.27) | ($0.70) |
| Real-estate operating NOI | $76.2 million | $77.1 million | $232.0 million | $225.6 million |
| Diluted FFO per share | $0.52 | $0.49 | $1.61 | $1.08 |
Q3 operating loss chiefly reflected a $46.1 million noncash impairment charge on Greater Philadelphia properties. Nine-month operating income increased despite lower service revenues; the common-shareholder loss narrowed year over year, partly due to higher property-sale gains and lower impairment losses. Same-office NOI rose $6.4 million for the nine-month period, while same-office average occupancy declined to 89.5% from 90.3%.
For the first nine months, operating cash flow was $139.7 million, versus $104.9 million in 2011. Investing cash flow provided $83.8 million, primarily reflecting property-sale proceeds; financing used $224.0 million, including net debt repayments and dividends. Cash and cash equivalents were $5.0 million at quarter-end; restricted cash and marketable securities were $20.9 million.
Total assets were $3.60 billion and total debt was $2.17 billion at September 30, 2012, down from $3.87 billion and $2.43 billion, respectively, at year-end 2011. The revolver had $701.5 million available within an $800 million commitment. Debt fair value was estimated at $2.19 billion. The company reported compliance with its financial covenants.
Material changes and capital allocation
- COPT sold 35 operating properties totaling 2.3 million square feet and other properties for aggregate transaction values of $313.6 million. Net proceeds after secured debt repayment and transaction costs were approximately $291 million, used primarily to reduce the revolver.
- It acquired a fully leased, 202,000-square-foot Herndon, Virginia office property for $48.3 million.
- COPT issued $172.5 million of Series L preferred shares at liquidation preference, receiving $165.7 million net of underwriting discounts, and redeemed $55.0 million of Series G preferred shares. The Series L dividend rate is 7.375%; preferred dividends increased overall.
- The quarterly common dividend declared was $0.275 per share, versus $0.4125 a year earlier.
- After quarter-end, COPT issued 8.6 million common shares at $24.75 per share, receiving $204.9 million net of underwriting discounts before offering expenses; proceeds were used to repay revolver borrowings and for general corporate purposes.
Outlook, risks, and unusual items
Management stated that liquidity and capital resources were adequate for near- and longer-term requirements, while expecting to continue selling Strategic Reallocation Plan properties through 2013. It expected to spend more than $70 million on construction and development and approximately $20 million on operating-property improvements during the remainder of 2012, funded primarily with borrowing facilities. No specific earnings or FFO guidance was provided.
The portfolio’s operating-office occupancy was 88.1% at quarter-end; management attributed much of the increase from year-end to sales of lower-occupancy properties. Same-office occupancy was 89.3% at quarter-end, slightly below year-end. Management cited a challenging leasing environment, a tepid recovery, and uncertainty about defense-spending reductions and potential sequestration beginning as early as January 2013. The wholesale data center had 3 megawatts operating; a new lease added an initial 1-megawatt commitment.
Greater Philadelphia properties were judged no longer consistent with investment criteria, prompting the $46.1 million Q3 impairment and a shorter planned holding period. The charge included expectations of approximately $25 million in future redevelopment expenditures. Separately, foreclosure proceedings began in October on mortgage debt encumbering an unconsolidated joint venture’s properties; COPT had guarantees with a maximum stated exposure of approximately $65 million, subject to recovery rights. Other material considerations include debt maturities, variable-rate exposure, development execution, government demand, and potential dilution from equity issuance.
A $3.3 million net out-of-period adjustment was recorded in 2012 for prior-period accounting errors, reducing net income; management concluded the errors were not material to 2011 or expected 2012 annual results. COPT reported no material litigation, no material change in disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether the Greater Philadelphia impairment assumptions, expected property-sale timing, and approximately $25 million of redevelopment spending remain appropriate.
- Current leasing, occupancy, renewals, and tenant demand—particularly exposure to government and defense budgets and the potential effects of sequestration.
- Debt maturities and refinancing plans, revolver availability, interest-rate sensitivity, and the terms and restrictions of credit facilities.
- Potential obligations arising from the joint-venture foreclosure, guarantees, and other contingent funding commitments.
- The impact of the October common-share offering and preferred-share costs on per-share results, leverage, and distributions.